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Economics Forum

Topic: A Study on Initial Public Offerings in

Hong Kong

Speaker: Joe Wong

14th April 2009

Organized by Society of Economics & Finance Department

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Listing of Industrial and Commercial Bank of China in October 2006

the world’s largest recorded IPO

Hong Kong Exchanges and Clearing Ltd. (HKEx) became the world’s second largest market for IPO fund-raising after London Stock Exchange, surpassing the New York Stock Exchange in 2006. (World Federal Exchanges,2006)

2006: 26% 2007: 23%

IPO market fever is spreading to the general public

Introduction

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Introduction

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Introduction

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Introduction

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Alibaba.com : 566,216 applications;

10% of the population (over 19 years of age)

an oversubscription of about 257 times

freezing about US$57.4 billion

from HK$13.5 to HK$39.5 per share (192.6% )

Hong Kong is an ideal place to study the IPO process.

Introduction

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The Hong Kong IPO market has surged significantly and has been ranked the top 5 exchanges in the world since 2002.

First research question:

“What are the recent developments of the IPO market in Hong Kong?”

Objectives of the Study

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To answer the first question:

a brief history of the stock market and its trend of growth are explored, followed by a comprehensive analysis of the recent developments of IPO market.

Objectives of the Study

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Retail participation in the HKEx reached its historical high in 2007:

2 million individuals the percentage of adult population (36%) Second research question:

“What is the individual investor behaviour in IPO investment?”

Objectives of the Study

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To answer the second question: a survey research method is used to study the

general public’s opinion on IPO investment. a literature review about the behaviour of IPO

investors is needed for designing the questionnaire and formulating the hypotheses.

after collecting and analysing the data, we can examine the behaviour of individual investors in IPO investment.

Objectives of the Study

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Tianjin Port Development Holdings Ltd.: oversubscription rate was 1,703 times

the highest oversubscription rate between 2002 and 2007.

Finally, the third research question is:

“What are the factors affecting the individual investor demand for IPO shares?”

Objectives of the Study

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To answer the third question:

an ordered probit model is adopted to test the hypotheses in order to find out the factors affecting the individual investor demand for IPO shares.

Objectives of the Study

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Recent Developments of the IPO Market in Hong Kong

Growth of the Number of IPOsGrowth of the New Capital RaisedGrowth of the New Capital Raised by

IPOsListing Rules and Procedures

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Recent Developments of the IPO Market in Hong Kong

Methods of ListingSubscription for IPO Shares and

Methods of AllotmentPrice Performance of IPOs

Figure 2.1: Number of Listed Companies from 1980 to 2007

Figure 2.2 Total Market Capitalization of Listed Companies in Hong Kong from 1980 to 2007

Figure 2.4: Number of IPOs from 1980 to 2007

513

52

26

49

8288

117

62

84

4212

5 548

1519

3832

5448

62 677073

90

0

20

40

60

80

100

120

140

Table 2.7 The Rank of Stock Exchanges in the World by New Capital Raised by IPOs from 2002 to 2007

StockExchanges

New Capital Raised by IPOs

in 2007(USD million)

Rank

2007 2006 2005 2004 2003 2002 2001

NYSE Group 60,385.80 1 3 1 1 1 1 2

Shanghai SE 57,770.00 2 9 37 14 9 5 N/A

London SE 50,026.20 3 1 2 4 6 3 5

Hong Kong SE 37,485.90 4 2 3 5 5 4 8

Sao Paulo SE 27,834.20 5 14 18 32 41 29 N/ABME Spanish Exchanges

21,726.20 6 6 9 2 2 2 3

Australian SE 16,725.50 7 8 5 9 8 13 11

Nasdaq 16,192.60 8 5 8 3 7 8 4

Euronext 13,329.90 9 4 4 7 19 11 1

Bombay SE 9,642.80 10 15 23 13 11 18 N/A

Figure 2.9 The Rank of Shanghai SE, Sao Paulo and Bombay SE by New Capital Raised by IPOs from 2002 to 2007

5

37

9

29

41

32

1818

11

23

Shanghai SE2

9

14

5Sao Paulo SE

1410

Bombay SE

13

15

0

5

10

15

20

25

30

35

40

45

2002 2003 2004 2005 2006 2007

Table 2.8 Capital Raised by IPOs as percentage of GDP of the Top 20 Stock Exchanges in 2007

Rank Stock ExchangesCapital raised by IPOs(USD million)

CountryGDP(USD

million)

Capital raised by IPOs as percentage of GDP

1 NYSE Group 60,385.80 United States 13,811,200 0.44

2 Shanghai SE 57,770.00 China 3,280,053 1.76

3 London SE 50,026.20United

Kingdom2,727,806 1.83

4 Hong Kong Exchanges 37,485.90 Hong Kong 206,706 18.13

5 Sao Paulo SE 27,834.20 Brazil 1,314,170 2.12

6 BME Spanish Exchanges 21,726.20 Spain 1,429,226 1.52

7 Australian SE 16,725.50 Australia 821,716 2.04

8 Nasdaq 16,192.60 United States 13,811,200 0.12

9 Euronext 13,329.90 N/A 3,985,292 0.33

10 Bombay SE 9,642.80 India 1,170,968 0.82

Table 2.8 Capital Raised by IPOs as percentage of GDP of the Top 20 Stock Exchanges in 2007 (Con’t)

11National Stock Exchange India

7,874.10 India 1,170,968 0.67

12 TSX Group 7,369.50 Canada 1,326,376 0.56

13 OMX Nordic Exchange 6,057.40 N/A 23,715,746 0.03

14 Borsa Italiana 5,930.80 Italy 2,107,481 0.28

15 Shenzhen SE 5,670.70 China 3,280,053 0.17

16 Warsaw SE 5,486.40 Ploand 420,321 1.31

17 Singapore Exchange 5,159.80 Singapore 161,347 3.20

18 Colombia SE 4,597.10 Mexico 893,364 0.51

19 Istanbul SE 3,372.80 Turkey 657,091 0.51

20 Korea Exchange 3,170.00 Korea, Rep. 969,795 0.33

Table 2.17 Summary Review of the Levels of Underpricing in Hong Kong

　 No. of Issues Study Period Levels of Underpricing (%)

Dawson and Hiraki (1985)

31 1979-84 10.9

Dawson (1987) 21 1978-83 13.8

McGuinness (1993) 92 1980-90 16.6

Aggarwal, Liu and Rhee (2003)

256 1993-97 20.8

SFC (2007) 64 2005 4.0

59 2006 26.0

SFC (2008) 80 2007 23.0

HKEx1 (2007) 296 2002-05 N/A

Figure 2.12 Absolute and Relative IPO Underpricing and Long Run Price Performance in 2006

Figure 2.13 IPO underpricing and Long Run Price Performance for Mainland Enterprises and non-Mainland Enterprises in 2006

Offer: 13.5; Highest: 41.8; Lowest: 3.46(2007/11/06) (2007/12/03) (2008/10/28)

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Conceptual Framework

MMost IPO ost IPO researchresearchfocuses on focuses on three mainthree mainphenomenaphenomena

11Initial UnderpricingInitial Underpricing

22Long-run underperformance Long-run underperformance

33‘‘hot issue’ markethot issue’ market

Literature Review

Initial Underpricing: Tinic (1988); Ritter and Welch (2002); Loughran and Ritter (2003); Brau and Fawett

(2006)

Long-run Underperformance: Ljungqvist, Nanda and Singh (2006); Dorn (2007); Agarwal, Liu and Rhee (2003)

“Hot Market” Issue: Alti (2004); Ljungqvist and Wilhem, Jr. (2005)

Figure 3.1 Relationship of the IPO Process to the Three IPO Phenomena

Issuers Investors(Individual / Institutiona

l)

Underwriters Investors(Individual / Institutiona

l)

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Conceptual Framework

relatively little literature on using questionnaire survey to study the behaviour of individual investors in the IPO investment.

In the hope of contributing to fill in the gap of this area of research, this study was carried out:

to investigate the individual investor behavior in IPO investment and

to find out the factors affecting the individual investor demand for IPO shares.

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Research Method

Oct. Oct. 20062006

Preliminary Study (Oct. 2006): Preliminary Study (Oct. 2006): •Questionnaire of 18 questionsQuestionnaire of 18 questions•3,120 respondents3,120 respondents•Revised the questionnaire and Revised the questionnaire and add 8 questionsadd 8 questions

Sept.Sept.20072007

Questionnaire of 26 QuestionsQuestionnaire of 26 Questions

Pilot Study (Sept. 2007):Pilot Study (Sept. 2007):Revised the questionnaire againRevised the questionnaire again

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Survey : Questionnaire Design

Three main partsThree main parts

Q21 - Q26

demographic demographic characteristics: characteristics: gender, age, gender, age, education level, education level, personal monthly personal monthly income, occupation income, occupation and place of and place of residenceresidence

focuses on focuses on general general public’s public’s opinion on opinion on IPO IPO investmentinvestment

Q1 – Q3; Q15 –Q20

the investor the investor behaviour behaviour in IPO in IPO investmentinvestment

Q4 – Q14

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Survey : Sources of Data

Questionnaire Design

1,640 respondents (58.3%) applied for IPO shares in the period Oct. 2006 to Sept. 2007

2,815 respondents

the first two weeks of October 2007

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Results of the Survey

The frequency with which a retail investor applies for IPO shares

NoNo 41.7 %41.7 %

YesYes 58.3 %58.3 %

If yes, 6 times or moreIf yes, 6 times or more 43.5 %43.5 %

Mean and MaximumMean and Maximum6.75 times6.75 times

and 60 timesand 60 times

Figure 4.9 Frequency Distribution by Number of Times of Subscription for IPO Shares in the Last Year

43.5%

Question 15: Have any of your family members or friends

subscribed for IPO shares in the last year?

　 Frequency Percent

No 628 22.3

Yes 2187 77.7

Total 2815 100

Figure 4.11 Frequency Distribution by Perception of the Risk of Investing in IPOs

51.4%

14%

Figure 4.16 Frequency Distribution by Source of Information

Question 6: Have you studied the prospectus before investing

in IPOs?

　 Frequency Percent

No 1029 62.7

Yes 611 37.3

Total 1640 100

　 　 　

Figure 4.18 Frequency Distribution by Number of Minutes Spent on Studying the Prospectus before Investing in IPOs

46.6%

Figure 4.24 Frequency Distribution by Number of Lots of Applying for IPO Shares

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15.3%

Figure 4.26 Frequency Distribution by the Time to Sell the Allocated Shares

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61.5%

Figure 4.27 Frequency Distribution by Satisfaction of the Return from Investing in IPOs

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94.1%

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Conclusions and Recommendations

First, one of the key empirical findings:

If an investor’s family member or friend has applied for IPO shares,

the investor is more likely to apply more often for IPO shares.

Figure 4.17 Distribution Chart by Most Important Factor Influencing Investors’ Decision to Apply for IPO Shares

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Conclusions and Recommendations

Therefore, if one of an investor’s family members or friends has experience and had earned some money in IPO investment, other family members and friends are likely to take part as well due to the ‘close’ relationships with family members and friends, especially in Chinese culture.

Investors’ investing decisions are influenced by the so-called ‘herd movement’.

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Conclusions and Recommendations

Moreover, there were high multiples of oversubscription during 2006 and 2007.

If a family member wants to apply for IPO shares and have a good chance of getting at least one lot, he/she may encourage all family members to apply.

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Conclusions and Recommendations

Last but not least, only 15.7% of the general public thought that the HKSAR Government has provided enough investment education for them.

Figure 4.13 Frequency Distribution by Investment Education Provided by the Government

15.7%

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Conclusions and Recommendations

As mentioned before, 58.3% of respondents had subscribed for IPO shares in the last year. 43.5% of the total 1,640 respondents had subscribed for IPO shares 6 times or more

However, there were 27.3% of them claiming to be a novice (with level of experience equals 3 or less than 3 out of 10).

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Conclusions and Recommendations

In consideration of the sustained and rapid economic growth in China, there will be more Mainland companies raising funds in Hong Kong.

Therefore, I suggest that the government should devote more resources towards investment education for the general public in order to strengthen Hong Kong’s IPO market.  

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